RMD-To Distribute or Not to Distribute

[taxconnected]

The last i heard (before leaving for summer) was that it isn't necessary to take your RMD for 2009. Is that still in effect?
In my case a little analysis indicates that if I don't take the RMD this year it will just mean that I have to take a greater amount next year.
Anybody have any thoughts about this.

[Bees Knees]

No RMD for 2009 required

The greater amount next year if you don't take RMD for 2009 is not equal to the amount you otherwise would have been required to take for 2009. If anything is greater, it would be a small fraction of the amount you otherwise would have taken for this year.

Thus, why pay tax on something you don't need? This of course assumes you do not need to spend the money for this year.

[JohnH]

I like Bees' approach.
If the recipient doesn't need the money, why pay tax on it prematurely? After all, that;s why it's in a qualified plan in the first place...

[ChEAr$]

The greater amount next year if you don't take RMD for 2009 is not equal to the amount you otherwise would have been required to take for 2009. If anything is greater, it would be a small fraction of the amount you otherwise would have taken for this year.

Thus, why pay tax on something you don't need? This of course assumes you do not need to spend the money for this year.

Agree, and that's why I chose not to take the 2009 rmd.

However, if I had thought for one moment that my tax bracket would be higher for 2009,
I'd taken it in a heartbeat.

[taxconnected]

rmd distribution

Thanks for the replies. Always appreciate other points of view.

[Roland Slugg]

Even though the 2009 RMD was waived by Congress it may be smart to advise some clients to take a partial distribution in 2009 anyway. There are two situations where this would be wise:

(1) If the client/taxpayer takes no distribution in 2009 he will have "negative" taxable income on his 2009 return. In this case, he should withdraw at least enough to raise his taxable income to just above zero. By doing this he can receive a tax-free distribution from his IRA or 401(k). (He may also wish to go beyond this point ... see (2) below.)

(2) If the client/taxpayer takes no distribution in 2009 he will be in the 10% tax bracket on his 2009 return. A taxpayer in this situation should consider withdrawing enough from his IRA to raise his 2009 taxable income to the top of the 10% bracket, thus receiving a very "cheap" distribution. As another has pointed out above, this concept may be extended to any taxpayer who is in one tax bracket this year ... such as the 15% bracket ... but will likely be in a higher tax bracket in 2010. The idea is to get the funds out this year and pay 15% instead of paying 25% or more on the same funds next year.

Invoking point (2) may be inadvisable for a taxpayer who has net LTCG in 2009 and whose taxable income will extend beyond the top of the 15% tax bracket. In a case like that it is actually best to reduce the ordinary income in the 10% bracket, as this will lower the gain on the LTCG by 25%! The reason for this surprising result is as follows: First, the 10% tax on the ordinary income is eliminated, and then an equal amount of LTCG moves "down" into the 15% tax bracket which, for LTCGs, is actually taxed at 0% in 2009 (and 2010 unless changed by Congress). Thus, the federal tax saved by a T/P in this position will be $250 per $1,000 of ordinary income eliminated. If this seems contra-intuitive, try it with the planning screen in your tax prep software.